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ECN 104 (388)
Chapter 2

Economics Chapter 2.docx

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Ryerson University
ECN 104
Tsogbadral Galaabaatar

Economics Chapter 2 Scientific Method: The dispassionate development and testing of theories on the workings of the universe. Since experiments are very difficult to conduct in economics, economists use historical events as natural experiments. Ex. Decrease in house in sales after interest hike Assumption: is used to simplify complexity of the world. Ex. To study consumption behaviour, we may assume there are only 2 goods. Unrealistic, but will give a valuable insight on consumption behaviour. Economic Model: is an explanation of workings of an economic phenomenon, based on simplifying assumptions Circular-Flow Diagram: a visual model of the economy that shows how dollars flow through markets among households and firms Factors of production: are the inputs that are necessary for production such as land, labour and capital In the market for goods and services, households are buyers and firms are sellers. In the market for factors of production, households are sellers and firms are buyers. If you trace a loonie in the economy for period of time, it will be used in transactions in the above two markets repeatedly. Production Possibilities Frontier (PPF): is a graph that represents all the possible combinations of goods the economy can produce, given the available factors of production & available production technology. We assume that there are 2 goods. Since the factors of production are limited in quantity, not every combination of goods is feasible.  Opportunity cost is what you have to give up in order to obtain something.  If economy moves from one efficient point to other on the PPF, it faces a trade-off. Inc
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